Many potential adoptive parents find that adopting a child can put a strain on family finances. But there are several available adoption tax credits and benefits that offset the expenses of adopting a child.
State and Federal Adoption Tax Credits
Adoptive families can offset their adoption costs by utilizing the Federal Adoption Tax Credit, which is non-refundable. The maximum 2012 adoption tax credit is $12,650. For 2013, the maximum adoption tax credit is $12,970, for all qualifying adoption expenses, and is non-refundable.
In January 2013, the Federal Adoption Tax Credit was made permanent. The adoption credit is not refundable, which means that only those individuals with tax liability (taxes owed) will benefit. The credit will remain flat for special needs adoptions (those involving children who are deemed hard to place by a child welfare agency), allowing those families to claim the maximum credit regardless of expenses.
If the family also lives in a state that offers an adoption tax credit (amounts vary by state), they may receive credit for additional expenses as well.
The adoption tax credit income limit is based on modified adjusted gross income (MAGI) and is recalculated each year.
Adoptive parents who work for companies with an adoption assistance program also receive a tax break. Parents can receive up to $12,970 in reimbursement from their employer for adoption expenses without paying taxes on that benefit. However you cannot double-dip, meaning you cannot take a tax credit for adoption expenses reimbursed by your company, as well. Read Employer-Provided Adoption Benefits to learn more about these adoption assistance programs.
Follow the American Adoptions' blog for any new updates on the adoption tax credit.
What Are Qualifying Adoption Expenses?
Qualifying adoption expenses are reasonable and necessary adoption fees. They include traveling expenses while away from home, and other expenses directly related to, and whose principal purpose is for, the legal adoption of an eligible child.
Funds allowed as a credit or deduction under any other provision cannot be applied toward the adoption tax credit. Qualifying expenses must be accrued in a domestic, international or foster care adoption; surrogacy or stepparent adoptions do not qualify for the tax credit.
For domestic adoptions, you can claim the credit for adoption-related expenses in the year the adoption is completed. If the adoption is not completed, you can claim the credit the following year.
Follow this link to Form 8839 to learn how to file for an adoption tax credit or exclusion and for information regarding required attachments.
Adoption Disruption - Tax Credit Benefit Still Applies
Families who experience a disrupted adoption (a situation that did not end in a completed adoption) may also benefit from the adoption tax credit. A family that qualifies for the adoption tax credit may also deduct qualifying adoption expenses from a disrupted adoption. However, families must wait one year before filing for the credit. The maximum credit level also still applies - no matter how many adoptions or disruptions a family experienced during the year.
Dependency Tax Exemption
Adoptive parents may take the same dependency exemption on their income taxes for adopted children (and children placed with them in a not-yet-finalized adoption) as they would for biological children. The exemption reduces taxable income. The amount of the dependency exemption is adjusted. Families must provide more than half of a child's support to list the exemption.
Adoption Tax Credit Before Finalization
Every year, adoptive families ask if they can file taxes without their child’s social security number, which is typically received after the adoption is finalized.
Your adoption attorney should apply for a SSN along with the final amended birth certificate after the finalization court hearing. If you do not have these items yet, you or your accountant and/or tax representative can apply for a temporary tax identification number for the baby. You can file your taxes with that number. Here is a link to Form W-7A for information about obtaining a temporary tax ID number. You can also search the IRS website for Adoption Taxpayer Identification Number information.
For more information on the adoption tax credit and exclusion, visit www.irs.gov. American Adoptions recommends that you contact a local accountant or qualified tax professional for more specific information for your family.
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